Category Archives: Exceptions

Tax Reform 2017: Senate Passes Final Version of Its Tax Bill

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The initial U.S. Senate tax reform bill contained two amendments to the UBIT that would result in additional taxes being imposed on some exempt organizations: the taxation of income from licensing an organization’s name or logo and the prohibition of netting income and losses from multiple trades or businesses. The initial Senate bill is discussed here. The U.S. Senate passed a final version of its tax reform bill on December 2, 2017. The final bill omits the change in licensing income but retains the netting restriction.

Sale or Licensing of Exempt Organization’s Name or Logo

Although royalties are generally excluded from the UBIT as passive income, the initial Senate bill proposed to tax royalty income from the licensing of an exempt organization’s name or logo to a for-profit company. The final bill omits the name and logo licensing provision and allows such licensing income to be excluded as royalty income.

This change comes as particularly good news to colleges and universities, which derive considerable royalty income from the sale of apparel and other items displaying their names and logos.

UBTI of Multiple Unrelated Trades or Businesses Separately Computed

The final Senate tax bill retains the provision that prevents an exempt organization from netting income and losses of multiple trades or businesses. If, for example, an exempt organization conducts Unrelated Business A for a profit and incurs a loss in Unrelated Business B, the present law would allow the organization to net the income and loss. The loss from Business B would reduce the UBIT payable on the income from Business A. Under the Senate proposal, the organization would report UBTI from Business A and would deduct the loss from Business B in accordance with the net operating loss rules.

The anti-netting provision would only affect organizations that carry on two or more unrelated trades or businesses. As a reminder, the IRS may treat what would normally be considered a single trade or business as multiple trades or businesses for purposes of the UBIT. For example, a museum’s gift shop would ordinarily be regarded as a single trade or business. For purposes of the UBIT, however, the IRS may treat the sales of different items as different trades or businesses. For example, assume that an art museum sells art books and history books in its gift store. The IRS would treat the sale of art books as a related business, but the sale of history books would likely be considered an unrelated business. The sale of apparel and toys would also be evaluated as separate trades or businesses. Under the Senate proposal, the museum could not offset a profit from the unrelated business of selling history books with a loss from the unrelated business of selling toys. 

Next Steps

Because there are significant differences between the tax reform bills passed by the House and Senate, it is likely that a reconciliation procedure will be used to come up with a bill that can be passed by both bodies and signed by the president. If the bill becomes law before the end of the year, the provisions affecting the UBIT will take effect for tax years beginning in 2018.

Inflation Adjusted Items for 2017

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 Rev. Proc. 2016-55 provides exempt organizations with two inflation adjustments for 2017.

1. Dues Paid to Agricultural or Horticultural Organizations

Agricultural and horticultural organizations described in §501(c)(5) are exempt organizations subject to the UBIT. Section 512(d) contains a special rule under which no portion of member dues paid to an agricultural or horticultural organization can be treated as UBTI by reason of benefits or privileges to which members are entitled. For tax years beginning in 2017, the exclusion applies so long as:

  •     Payment of dues is a condition of membership; and
  •     The required annual dues do not exceed $162.          !

When §512(d) was enacted in 1996, effective for tax years beginning after Dec. 31, 1986, the dollar limitation was $100. The limitation has been adjusted for inflation for taxable years beginning after 1995. Section 3.29 of Rev. Proc. 2016-55 provides that the inflation adjusted amount for 2017 is $162.

2. Limitation for Contributions Solicited Using Low Cost Articles

Charitable organizations sometimes solicit contributions by mailing out low cost items to potential donors. For example, the envelope containing the solicitation may state “A Free Gift For You Inside.” The organization hopes that the reference to the gift may motivate the recipient to open the envelope and that receipt of the item will spur the recipient to respond with a contribution. Typical low cost articles furnished with solicitations include calendars, pens, greeting cards, note pads, and mailing labels. Because the sale of goods constitutes a trade or business for purposes of the UBIT, contributions received in connection with low cost articles might be considered a taxable sale of the items by the organization to the extent of the value of the items. To prevent this result for inexpensive items, §513(h) provides that the activities relating to the distribution of low cost articles are not an unrelated trade or business if the distribution is incidental to the solicitation of charitable contributions. For taxable years beginning in 2017, a low cost article is an item that cost the organization $10.70 or less.

When the low cost articles exception was enacted in 1986, the exception applied to articles costing $5.00 or less. The amount has been indexed for inflation since 1988. Section 3.30(1) of Rev. Proc. 2016-55 provides that the inflation-adjusted amount for 2017 is $10.70.

Resources: Rev Proc. 2016-55, 2016-2 C.B. 707